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Did dropping the corp tax rate in 2017 "work"?

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Biden Gets Corporate Taxes Backward

A reduced rate wasn’t a ‘giveaway’ to large firms. It set off an economic boom and increased wages.

By Kevin Brady and Douglas Holtz-Eakin, WSJ

May 30, 2024 3:54 pm ET


President Biden wants to raise corporate taxes. In a March “fact sheet,” the White House complains that “corporations received an enormous tax break in 2017” and promises to raise the levy in the interest of building “a fairer tax system.” Yet the Trump tax cuts were a boon for American workers. The Tax Cuts and Jobs Act of 2017 spurred businesses investment in innovation, technologies, software, equipment and facilities. It also restored U.S. corporations’ international competitiveness by reducing the corporate tax, a stealth levy on workers’ wages.


By dropping the rate to 21% from 35%, Congress set off an economic boom. Coupled with a modern international tax code, the TCJA’s rate cuts drew more investment, research and intellectual property back to the U.S. Each dollar of corporate-tax reduction has been estimated to increase economic production by 44 cents. The TCJA stimulated U.S. investment by 20% among companies experiencing the average tax change. For workers, the 9% increase in inflation-adjusted earnings between Jan. 1, 2018, and Dec. 31, 2020, was the fastest growth since the government began publishing data in 1979. The corporate-rate cut has been the wind at American workers’ backs for years.


Lawmakers of both parties are at risk of forgetting these lessons. Mr. Biden proposes raising the corporate tax to 28%, which coupled with state taxes would make the U.S. the second-highest-taxing nation among the 38 members of the Organization for Economic Cooperation and Development. Under this scheme, the U.S. tax would also significantly exceed China, an adversary bent on dominating U.S. manufacturing and advanced technologies.


Workers would bear the brunt of that increase. Based on the Treasury Department’s research, raising the corporate rate to 28% would by 2034 impose a $500 billion tax hike on families making less than approximately $300,000 a year. That violates Mr. Biden’s pledge that “no one earning less than $400,000 per year will pay a penny in new taxes.”


Before 2017 Washington was saddled with the highest corporate-tax rate at 35% and clung to a “worldwide” system of taxation, by which U.S. companies were taxed at home and abroad, while competitors began to adopt a single tax territorial system.


In practice, this meant that if a U.S. company and a German one competed in Sweden, the German one would pay only Swedish tax. Its American competitor would pay the Swedish tax and then the U.S. tax, topping up its bill to 35%. But there was a perverse incentive: The company could defer paying the difference if it didn’t repatriate its profit back to the U.S. To remain competitive, companies locked trillions of dollars in profits offshore. Worse, if a U.S. firm became involved in a cross-border merger or acquisition, its fiduciary responsibilities would dictate that its headquarters be moved out of the high-tax U.S., known as an inversion.


Workers knew that punishing dynamic well. Thousands of them were left behind as their companies’ leadership, struggling to compete, packed up and moved away. The TCJA sought to arrest this decline by freeing corporations from the obligation to pay U.S. taxes on overseas earnings and by allowing them to write off more of the cost of new equipment, machinery, software and buildings.


Each of these provisions was intended to increase American firms’ competitiveness and increase workers’ well-being. They succeeded. The U.S. suffered the exodus of 33 companies between 2005 and 2015. As the Tax Policy Center reports, there have been no major tax-motivated inversions since 2017.


Yet the reforms’ accomplishments aren’t necessarily permanent. Because of budgetary constraints, Congress set most of the TCJA’s individual provisions to expire at the end of 2025. Rather than make them stick, Democratic lawmakers are now eyeing the corporate rate as a piggy bank to finance their spending priorities.


That would be a mistake. The average corporate rates in the OECD and European Union are 23.7% and 21%, respectively. It would serve no one except our international competitors if the U.S. reverted to an uncompetitive tax code.


This may surprise those inundated with claims that the TCJA’s corporate reforms were “giveaways” to large corporations. But that’s bad economics, especially considering U.S. corporations paid for roughly 80% of the lower corporate rate with reforms and give-backs. Corporate-tax revenue today is higher than it was projected to be at the 35% rate.


Corporations operate on behalf of their shareholders by hiring employees to produce and sell goods and services to customers. If Washington passes a corporate-tax hike, the burden doesn’t stop at a check to the Treasury. It must be financed by one or more of that trio: shareholders, workers and customers. The reverse—higher dividend payments to retirees, better wages for workers and reduced inflation pressures on customers—couldn’t plausibly be considered a giveaway.


The choice isn’t simply between the current rate and tax hikes. The right framework is to pair the competitive corporate rate with enhanced fairness, greater simplicity and faster economic growth. This is a pivotal moment for preserving the opportunities and competitiveness of American workers. Congress and the president shouldn’t shirk from it.


Mr. Brady served as chairman of the House Ways and Means Committee, 2015-19. Mr. Holtz-Eakin, president of the American Action Forum, was director of the Congressional Budget Office, 2003-05.

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